In 2009, in an attempt to profit from hedged uranium commodity trades, Goldman Sachs bought a uranium trading house called NUFCOR International Limited. There have been many stories in the media recently that have tried to put a spin on this story or that simply have the facts wrong.
In this missive, I’m trying to provide the facts as they are so investors and speculators are better informed—so let’s talk about Goldman today.
The media loves painting big bankers—and specifically those at Goldman Sachs—as vampires whose only mission in life is to steal from the masses and plot evil strategies to do so more effectively.
Well, believe what you will, but when it comes to uranium trading, the Goldman Sachs guys simply have been smart businessmen, which I have to admire; and in the process they helped the nuclear-power industry. They had a great racket going until now, and I’ll explain why.
Speculating with Cheap Money
First off, thanks to its advantage of being a bank and the Fed’s loose-money policies, Goldman Sachs could borrow money at almost no interest. Next, the savvy GS bankers realized that uranium was trading at historic lows—production costs were higher than what the uranium could be sold for.
The company created a hedged trade, which guaranteed it a profit as it played the arbitraged opportunity between the spot market and the long-term market, and sold to the utilities at a profit.
Goldman Sachs sold about 15 million pounds of uranium annually. And it was not alone: Deutsche Bank was playing a similar game on a slightly smaller scale, selling around 10 million pounds annually.
To put these numbers into context, the annual amount of uranium the two banks traded is 5 million pounds more than all of Canada produces per year—and Canada is the second-largest uranium producer in the world.
Uranium Spot Market vs. the Long-Term Market
Note the circled spot where the green line meets the black line in the chart above. That’s where Goldman Sachs started buying uranium with cheaply borrowed money, selling it forward at the long-term (black-line) price and locking in a guaranteed profit by playing the arbitrage opportunity.
The utilities that needed the uranium for their nuclear reactors were quite happy buying it from Goldman Sachs. In fact, if the utilities had had their way, they’d have kept the arrangement, because it helped keep the spot price down and prevented them from needing a large inventory of uranium, so they wouldn’t have to put up the money to buy and store the uranium for a secure supply of nuclear fuel.
Also, the utilities couldn’t compete with Goldman Sachs or Deutsche Bank because they couldn’t make the same transactions. The banks got the loans to buy the uranium in the spot market at such a low interest rate that no corporation—not even the largest US utilities—could have achieved a cost of capital as low as that. Hence Goldman and other banks with commodity trading capacities had an obvious advantage over non-bank competitors.
But Goldman’s golden hedge is over, and the US government has forced the bank to sell its commodity trading firm. So who will buy Goldman and the other banks’ commodity trading firms?
Another Putin Sneak Attack on the Energy Sector?
We have a feeling the buyer is going to be the Russians indirectly, through Gunvor Group Ltd., one of the world’s largest commodity trading firms. Rumors are flying that the Russians are looking at consolidating the commodity trading houses of Goldman Sachs and Deutsche Bank. That alone may cause Vitol, Glencore, or Trafigura (the three largest commodity trading firms in the world) to make a bid to prevent the Russians from handling another 25 million pounds annually on top of the +40 million pounds per year they already control.
Regardless of who buys Goldman’s commodity trading firm, it’s realistic to assume that it will lead to a higher uranium spot price. The cost of capital will be higher and the arbitrage opportunity lower—unless, of course, the producers charge more for their uranium.
It’s no secret that the commodity traders at Glencore and Trafigura are even more cutthroat than the traders at Goldman Sachs, so we’re entering exciting times in the uranium sector. (Not to mention all of the other bullish reasons to invest in uranium, which we outline in the current issue of the Casey Energy Report.)
The best way to dip your toes in the water is to give the Casey Energy Report a try today. Test my newsletter for the next 3 months, and if you don’t like it or don’t make any money, just cancel within that time for a full refund, no questions asked.
So if you want to get behind the real winner betting against President Obama’s anti-nuclear policies and make some serious money from the inevitable bull market in uranium, click here for instant access to the current Energy Report edition.
Additional Links and Reads
This video event with an all-star cast—including Doug Casey, Frank Giustra, Rick Rule, and Ross Beaty—was one of the most inspirational events I have ever been part of. Listening to industry veterans who’ve made big fortunes was not just educational and inspirational, it was fun. The best part is, I know I’ll make a lot of money taking their advice. I can’t encourage you and your family enough to watch this free video.
Listen to this recent interview with CBC, where Marin is asked about uranium (starting around the 9:25 mark).
President Obama will not make any decisions on the Keystone Pipeline until after the midterm congressional elections in November 2014. Bloomberg does a great job reporting on the political evolution of the story, and we agree that no decision will be made one way or another until after the election.